Exam 7: Corporations: Reorganizations

Heart Corporation has net assets valued at $900,000 and an NOL of $300,000.On June 30 of the current year,Heart is acquired by Brain Corporation in a restructuring qualifying as a tax-free reorganization that causes an ownership shift of 30 percentage points for Heart's shareholders.Brain uses a calendar year for tax purposes.Assuming that the long-term tax-exempt rate is 8%,what is the maximum amount of Heart's NOL available to Brain in the current year?

In a "Type B" reorganization,voting stock of the acquiring corporation must be the sole consideration exchanged with the target corporation or its shareholders.

Music Corporation has three shareholders,Leonard,Henry,and Susan.Leonard and Henry purchased their stock two years ago from Susan (who started Music ten years ago).Music's income comes from the manufacturing of record players,cassette players,CD players,and substantial investments. Leonard and Henry consider the manufacturing of record and cassette payers to be marginal businesses and want to stop their production.Susan likes providing these players even if the market is marginal.Music has been producing them since it began and only started producing CD players six years ago.Susan thinks that CD players are just a passing trend. To resolve these issues,it is suggested that two new corporations be created: CD and Vintage.CD would receive all of the assets of the CD division and Vintage would receive all of the assets of the record and cassette player divisions.All of the stock of these corporations would be received by Music and distributed to the shareholders.Music would retain the investments.Susan would turn in some of her Music stock in return for Vintage stock,and Leonard and Henry would receive CD stock for some of their Music stock.All three shareholders would retain some Music stock as it still holds the investments.

Zepher owns 80 shares of Wagon Corporation common stock for which he paid $80,000.The other 20 shares belong to Zepher's sister,Xila,which she purchased for $20,000.Wagon has been very profitable (fair market value of $500,000)due in large part to the efforts of Xila.Consequently,Zepher and Xila have agreed that she should have a larger percentage of ownership in Wagon.Zepher will receive a $100,000 bond for 20 common shares and 10 shares of preferred stock for 30 shares of common stock.What is the amount of gain or loss that Zepher and Wagon Corporation will recognize on this transaction?

Neil Corporation is a car dealership that that has been in existence for 10 years.It has also been in the car leasing business for 6 years.Both businesses produce substantial amounts of cash,consequently Neil has been investing this cash into mutual funds for the past 10 years.Neil is interested in separating its businesses.It will create new corporation(s)to receive assets in exchange for stock.It will then distribute that stock to its shareholders.Which of the following is correct regarding this transaction?

Originally the courts (in opposition to Congress)determined that businesses should be able to restructure without being subject to taxation.To be consistent with court findings,Congress changed the Code to provide reorganizations with treatment similar to that given under § 351 for starting a corporation.

Lemon Corporation is having financial difficulties.Its liabilities now amount to $600,000 and its assets are only valued at $200,000.Further,Lemon has capital loss carryovers of $80,000 and NOL carryovers amounting to $350,000 at the time of its restructuring.Through a bankruptcy proceeding (Type G reorganization),Citrus Corporation becomes the successor corporation to Lemon.Which of the following statements is true with regard to the described transaction?

Match the following items with the statements below. Terms may be used more than once. a.Capital gain b.Continuity of business enterprise c.Continuity of interest d.Dividend e.Equity change f.Liability assumption g.Ordinary gain h.Ownership change i.Not recognized j.Sound business purpose k.Step transaction -Presents a problem when the target sells assets that the acquiring corporation does not want to acquire prior to a "Type C" reorganization.

While a "Type A" reorganization allows the acquiring corporation to transfer cash as well as stock,the continuity of interest doctrine requires that all stock transferred be voting common.

A consolidation is the union of two corporations whereas,in a merger,a new corporation is formed to receive the assets of two or more corporations.

With a divisive "Type D" reorganization,two corporations can be created to receive part of the assets of a distributing corporation in exchange for stock,providing that the distributing corporation receives a controlling interest in the new corporations.

A divisive "Type D" reorganization where the shareholders relinquish their stock and receive target stock is called a ___________________.If stock is not relinquished,it is a ___________________.When the distributing corporation is liquidated,the divisive "Type D" is called a ___________________.

To qualify as a "Type A" reorganization,consolidations must comply with the requirements of foreign,state,or Federal statutes.

What type of reorganization is affected in each of the following independent transactions? a. "A" reorganization, merger b. "A" reorganization, consolidation c. "B" reorganization d. "C" reorganization e. Acquisitive "D" reorganization f. "D" reorganization, spin-off g. "D" reorganization, split-off h. "D" reorganization, split-up i. "E" reorganization j. "F" reorganization k. "G" reorganization l. Taxable transaction -In exchange for all of Yellow Corporation's voting common and nonvoting preferred stock,Green Corporation transfers 40% of its voting common and nonvoting preferred stock to Yellow.The Green stock is distributed to the Yellow shareholders and then Yellow liquidates.Yellow becomes a subsidiary of Green.

In an acquisitive "Type D" reorganization,the target must control (own at least 80 percent of voting stock)the acquiring corporation after the reorganization.

Carlos purchased 20% of Target Corporation's stock five years ago for $50,000.In a transaction qualifying as a "Type A" reorganization,Carlos received $40,000 cash and 6% of Acquiring Corporation's stock (valued at $60,000)in exchange for his Target stock.Target had $300,000 accumulated earnings and profits prior to the reorganization.How does Carlos treat the exchange for tax purposes?

The French Corporation has assets valued at $1 million with an adjusted basis of $700,000.There are mortgages of $250,000 associated with these assets.Accent Corporation acquires all of French's assets by exchanging $800,000 of its voting stock and assumes $200,000 of French's liabilities.French distributes the Accent stock and remaining liabilities to its shareholders in exchange for their French stock and then liquidates.Which,if any,of the following statements is correct?

The "Type B" reorganization requires that the acquiring corporation obtain at least 80% of target corporation's stock through the reorganization.

In the business purpose requirement for tax-free treatment of a reorganization,it is the shareholder's business purpose that is paramount.

Match the following items with the statements below. Terms may be used more than once. a.Capital gain b.Continuity of business enterprise c.Continuity of interest d.Dividend e.Equity change f.Liability assumption g.Ordinary gain h.Ownership change i.Not recognized j.Sound business purpose k.Step transaction -May cause a gain in a "Type C" reorganization if the acquiring corporation in addition to its voting stock transfers cash.